How to Create a Financial 5 Year Plan
"Most people don't plan to fail; they fail to plan." — John L. Beckley
Where do you want to be five years from today, financially?
My guess is that your answer probably sounds something like this — "I want to be in a better position than I am now."
We all have dreams we want to pursue and goals we want to achieve. We want to make progress in our lives.
But do you have a clear idea of what you want financially? Have you given it some serious thought?
If you haven’t, then the days, months, and years will still pass by. But at the end of that time, you’ll likely comment that not much has changed. Or that you’ve been stuck in a rut.
Instead of vaguely wishing for a better financial future, create an actual game plan. It’ll serve as your roadmap to get you where you want to go. (See also: Financial IQ Test: How Healthy Is Your Financial Plan?)
Questions to Ask Yourself
First, let's ask some key questions about four financial fundamentals to find out where you are and where you want to go. Get out a piece of paper, and start writing!
Do you have debt? If so, how much?
Dumping your debt is an obvious way to move into a better financial position. You can’t build wealth until you dig yourself out of debt.
How soon do you want to be debt free? One year? Two years? Three years?
Your income is your greatest wealth-building tool. How much money do you make now?
More importantly, how much money do you want to be making in five years?
No job is 100% secure. If you were to lose your job, how long can you stay afloat and keep your bills paid? The size of your emergency fund will answer that question.
How big of an emergency fund do you want in five years?
Many people doubt that Social Security will provide anything of substance in the future, and pensions are fading away. As such, we’re all responsible for making sure we have a comfortable retirement nowadays.
How much do you want to have saved up for retirement in five years?
Create Your Plan
Now that you’ve answered these questions and have them written on paper, it’s time to create a plan. Write a statement for each area that describes how you’ll achieve your goals.
How are you going to pay off your debts faster?
I will be out of debt in two years. To make this happen, I will find a part-time job working evenings and weekends, an extra 10 hours a week. And for the time being, I will cut all expenses that aren’t absolute needs. These are temporary sacrifices that I will make until I’m debt-free.
As far as steps are concerned, I will utilize the snowball method popularized by Dave Ramsey. I will pay off the debt with the smallest balance first in order to get a quick win and build momentum.
What kind of job do you want? How much do you want to be making? How are you going to qualify for that type of work?
I now make $60,000 per year as a project analyst. I will be making $85,000 per year as a project manager by January 1st, 2018.
To qualify for this position, I will take advantage of my employer’s tuition reimbursement program and take project management courses on the weekend to expand my skill set. I will demonstrate my skills by asking for opportunities to lead projects. And I will stay up-to-date on advancement opportunities by checking job postings monthly.
How big of an emergency fund do you want?
Within five years, I will have an emergency fund that’s big enough to protect me for 12 months. I will follow this step-by-step emergency fund guide to help me achieve this.
How much do you want to have saved up for retirement in five years? In 2013, you can save $17,500 in your 401(k). You can also save $5,500 in your Roth IRA. Let’s say you contributed the maximum amount to both accounts. That’s a total of $23,000 each year. How can you do this?
I will save $211 each pay period and have it sent automatically to my Roth IRA using direct deposit. By the end of the year, I will have contributed the maximum amount of $5,500.
I will also save $673 each pay period and have it sent automatically to my 401(k) using direct deposit. By the end of the year, I will have contributed the maximum amount of $17,500.
With both my 401k and Roth IRA, I will have saved up $115,000 in five years.
Think of this as your financial mission statement. Customize your answers to fit your personal situation, and then follow through on your commitments. Read your plan daily to stay motivated. You'll be amazed at what you've accomplished five years from now.
Have you created a five year financial plan? How have you kept yourself on track?
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